Commodity Forecasts

This year is definitely one that’s going to require a plan that drives your marketing moves. In addition to structure, flexibility is key to capture a run up in prices along the way. A little luck doesn’t hurt, either. The tables are turned, as the livestock sector looks forward to profitable days ahead while crop prices take a hit. The following is a snapshot from leading experts on how 2014 is shaping up for the major commodities.

Prices, Exports Stay Rosy for Beef Cattle

Beef cattle fundamentals are shaping up to deliver a profitable and possibly record-breaking 2014. It’s no coincidence that as corn prices declined, cattle prices rallied. Stocker and feeder cattle have posted 25% to 30% price gains since May, boosting the feeder cattle index price for 750-lb. steers to more than $165 per cwt. Falling corn prices also provided a much-needed boost for feedlot operators. After two years of negative margins, cattle feeders are back in the black.
According to Sterling Marketing Inc. of Vale, Ore., feedyards saw profits of nearly $123 per head in early November.

Analysts point to declining supplies of cattle as the foundation of a strong market. The Jan. 1, 2013, inventory of beef cows was the lowest in 60 years, and number crunchers say cow inventories will be smaller again in early 2014.

Feedyards and stockers will aggressively seek cattle of all sizes, which will support higher calf and feeder cattle prices.

Robust beef exports add to a bright outlook. The U.S. Meat Export Federation says in the first eight months of 2013, beef exports are up 1% in volume and 10% in value to 767,017 metric tons valued at $4.01 billion. The export value per head of fed slaughter beef in August averaged $253.87, up $46.16 from 2012.

Can anything derail a booming cattle market in 2014? Analysts are nervous about ever-increasing retail beef prices and the effect on demand. Average retail beef prices in August 2013, the latest data available, was a record $5.39 per pound, according to USDA’s Economic Research Service.

Exports Dominate U.S. Dairy Forecast

Dairy economists are pointing to exports as the brightest constellation in 2014—with good reason: U.S. dairy exports in 2013 mark a fourth consecutive record year, as well as a new high for the ninth time in 10 years. U.S. dairy exports rose nearly 30% in value to $6.6 billion, compared with year-earlier levels, says Alan Levitt with the U.S. Dairy Export Council. In volume, exports of milk solids climbed by about 18% to 3.9 billion pounds.

U.S. dairy exports are on track to account for an impressive 15.4% of the nation’s 2013 milk output. "Five years ago, we exported just 5% of our milk production," Levitt says.

Adding to 2014’s optimistic outlook are improving margins for producers fueled by strong milk prices and lower feed costs. "Income over feed costs this year look to be the best since 2007," Levitt says.

Despite these factors, market watchers see a few clouds ahead. One feed source not expected to get any cheaper is alfalfa hay. Top-quality hay is $280 to $300 per ton.

Sluggish domestic consumption and high product inventories also remain concerns. Even so, analysts expect to see a surge in milk production as dairies seek to boost profits. That’s likely to pressure milk prices.

"Milk prices won’t collapse, but they may drop to $16.70 per cwt. by February," says Robert Cropp, professor emeritus at the University of Wisconsin-Madison.

Jerry Dryer, editor of the Dairy & Food Market Analyst newsletter, expects Class III prices to dip to $16 per cwt. in the third quarter of 2014 before rising to $16.75 in the fourth quarter. Class IV, which represent dairy powder products, will see strong demand overseas, just as Dairy Farmers of America’s new powder plant comes online in Nevada.

Pork Industry Ready to Hog More Corn

This past year was a turnaround time for cash-strapped hog producers. Low herd numbers and much lower corn prices has returned profitability to the industry. Chris Hurt, a Purdue Extension ag economist, says during the first half of 2014, hog producers should see profits of approximately $30 a head.

"While that sounds like a lot, producers are really just offsetting drought losses and doing a little better," Hurt says. "These are good returns. By next spring and summer, we should see extraordinary returns—maybe $40 per head."

"History says it takes five months of profits before we start to see herd expansion," he says. "October 2013 was the fifth month of profits, so we’re expecting producers to start expanding breeding herds; that will give us more hogs on the market starting in the fourth quarter of 2014."

By next summer, Hurt predicts the U.S. breeding herd will have expanded by 2% to 3%.

Higher retail costs have resulted from higher production costs. The retail price of pork in August 2013 was at a record high of $3.75 per pound, and it has affected consumption. Since 2007, the average American has reduced yearly pork consumption by about 5 lb.

Even though prices have been high, one pork cut is still in high demand—bacon. "We go through food fads," Plain says. "Bacon is an ‘in’ food right now."

Additionally, U.S. pork is in a great position to increase exports. "That’s three home runs," Hurt says. "If pork producers made it through to this point, they are survivors."

Prepare for a Stagnant Corn Market

Even after numerous production challenges in 2013, USDA still predicted a record corn crop, causing corn prices to tumble to $4 to $5. With corn prices still struggling, will farmers stick with corn this year? Current talk in the trade suggests more than 4 million corn acres will be lost, but Farm Journal columnist Bob Utterback thinks closer to 3 million acres will take a hit, but in lower-production regions.

Greg Wagner, president of GWX-Ag Advisors and an AgWeb market analyst, agrees. "There’s widespread expectations that there will be a reduction in corn acreage and an increase in soybean acreage," he says, "but it will not be nearly as dramatic as some are forecasting." He predicts a reduction of just 1 million to 1.5 million acres.

"We’ve had a surge in global corn production," Wagner says, citing areas such as South America and Ukraine that have boosted their production levels in recent years. "But the biggest wild card might be China," he says.

The first half of 2014 looks quiet. Utterback predicts that through May, corn might only have a 50¢ to $2 trading range, depending on the weather. From June through September, though, he forecasts that the market will become violent as crop conditions are reported.

"In light of the global demand side, the demographics of the world, the number of people moving up the food chain and production capacity, agriculture and producers as a whole have prospect for higher prices," Wagner says. "But not necessarily $8 corn and $15 beans."

With corn prices what they are, soybeans look more enticing. "If it’s good enough for you to shift acres, then prices are good enough to sell," Utterback says. "The real danger is not what the flat price does; it’s what the margin does."

Price Soybeans Early

If you didn’t sell soybeans right off the combine this fall, you might want to empty your bins soon. Prices could easily tumble toward spring and early summer. "Nearby futures of $12.75 have come down, but they’re still at a good place for producers—more than $1 above average production costs," says Chad Hart, ag economist at Iowa State University.

"The market is saying to sell," he says. Expect gradual price deterioration through 2014, he adds, noting that old-crop soybeans are an inverted market with little upside potential. Because of that, he doesn’t expect current levels to hold; deferred months are deeply discounted.

"The bulk of Chinese buying is now behind us," says Darrel Good, University of Illinois ag economist.

Brazil and Argentina have planted a record number of soybean acres, and the crop is off to a good start. It makes sense to price at least some 2014 sales on rallies, "but I would not be aggressively sold," Good says. "The South American crop is not made yet."

Producers can wait until crop insurance level guarantees are announced in February, based off November 2014 futures. "Crop insurance may allow producers to have a significant amount of downside risk covered," Good says.

The positive news for soybeans is on the demand side. USDA forecasts exports of 1.45 billion bushels for the current marketing year.

Domestic soybean crush has also marched higher, but "supplies are going up faster than demand," Good explains.

Two bearish factors are rationing demand. One is production of other oils, particularly palm oil. The second is the reduction of biodiesel targets in the Renewable Fuels Standard proposed by the Environmental Protection Agency.

Big Wheat Crop, Mildly Bearish Prices

While prices will be somewhat bearish thanks to a large corn supply for feed and strong wheat production globally, experts say 2014 will be a good year for U.S. wheat.

July 2014 wheat futures have been declining for several months, says Brian Williams, economist for Mississippi State University Extension Service. USDA has not published its 2014 acreage estimates, but private estimates indicate the crop will be larger than in 2013.

The international market will be an important factor for U.S. wheat prices in 2014, experts say. Harvests in Australia and Argentina, and the quality of those crops, will be key.

Prices in hard red winter wheat country have averaged about $7 per bushel this year. While prices are likely to be slightly lower for the 2014/15 marketing year, strong protein and milling characteristics coupled with tight ending stocks should keep prices favorable.

"I think it’s safe to say that right now, if you were projecting to June of 2014, that we will have a 1 billion bushel hard red winter wheat crop," says Kim Anderson, Oklahoma State Extension economist. If that’s the case, then in 2014/15, "we will rebuild the hard red winter wheat stocks."

There are several other significant international stories playing out, says Ed Usset at University of Minnesota Extension. China imports large amounts of wheat, while Canada is experiencing logistical problems in hauling off its blockbuster wheat crop. Basis levels also are reportedly wide.

That, coupled with the fact that 15% of wheat production worldwide goes to feed, makes it difficult to imagine how wheat could mount a great upward price surge. In general, wheat experiences about three major market highs: once during planting in the fall, once early in the year and once in May right before harvest, explains David Reinbott, University of Missouri Extension.

"If you missed that October sale, I’d probably hold off ‘til January or February," he says. "Once you get past the first of March, it really starts to go down pretty hard."

China Holds All the Cotton Cards

Cotton producers could be in for another wild ride in 2014 as the Chinese government sells its stockpile and announces new policies for the 2014/15 growing season.

O.A. Cleveland, an agricultural economist at Mississippi State University, expects prices to return to 80¢ or 90¢, with the usual rallies early in the year and during planting season. He thinks the Chinese government will refrain from dumping its reserves on the market for fear of undercutting the value of its reserve and hurting its domestic producers.

Jon Devine, a senior economist for Cotton Incorporated, isn’t quite as bullish about crop prices as Cleveland. Devine expects the market to go sideways until spring, when China will announce its reforms for the growing season. The rumor, Devine says, is that the Chinese will move away from making stockpile purchases and toward direct payments.

Cleveland forecasts the 2014 cotton crop to be a little smaller, but the high yields of recent years are here to stay, he says. To take out options for downside protection, John Robinson, agricultural economist at Texas A&M University, recommends farmers buy "near-the-money" put options and sell a "deep out-of-the money option" as a way to buffer a decline from revenue insurance policies.

The International Cotton Advisory Committee projects world cotton production will outpace consumption by roughly 2 million tons during the 2013/14 season. Supply and demand will come back into alignment during the 2014/15 season, which would bolster prices.